We
measure health in the real estate market by rent and price. By these
measures, no sector of the Greater Boston market has regained more
health since the crash of the early '90s than the office sector. Ten
years ago, offices were sold at a fraction of their cost and their 1988
price peak. The Wang Towers, Lowell's signature complex, wasn't so much
sold as given away. Today, by contrast, offices have far surpassed
their 1988 peak. All that holds them back is the memory of their price
pit of ten years ago.

Offices
are not alone in their resurgence. Other sectors and niches within
sectors have also performed well. For apartments, the market drop of
ten years ago roughly halved the prices investors had paid in the late
'80s for buildings from Allston/Brighton to the Route 495 suburbs.
Since that decline, reportsMarket Sourceof
the Appraisal Institute, from 1994 to mid-2000, Greater Boston
apartment rents have increased by 110% and prices by 120%. In the
luxury condominium market, a sub-sector, the Back Bay has seen top
prices jump from $475 per foot in 1992 to more than $1,900 per foot
today. The industrial sector saw its price peak in 1989 and its
decline, similar in degree to that of apartments, in 1992. By 1999,
industrials had still not returned to their 1989 peak. But industrials
have benefited from demand in other sectors, which resulted in
conversion of industrials to other uses like labs and offices.
Conversion produced scarcity, and at some locations in the Mystic River
Basin, where vacancy has approached 0%, rents for standard 18'-high
concrete block space have more than tripled in less than a year. Only
the retail sector has lagged. When the 1990 slump hit, rents for retail
space declined only marginally. And during the long economic boom that
followed, rents increased only marginally as well.Market Sourcereports
a Greater Boston retail sector rent increase of only 35% from 1993 to
2000. Retail is overbuilt and has had a harder time than other sectors
in becoming scarce.

No
large sector has out-performed offices. Eight years ago, Spaulding
& Slye reported, rent at the Dedham Executive Center, a
good-quality 1974 complex on Route 128, was quoted at $16.00 per foot,
gross; today the rate at the same complex is $33.00. Rents on Route 9
in Framingham and at the New England Executive Park in Burlington have
increased by 160% in the same eight-year span. The increase for Class A
buildings in the downtown Financial District is from 160% to 180%, as
at 100 Summer Street, where a 1993 rate of $29.00 per foot has become
$82.00 per foot in 2001. At Kendall Square in Cambridge, data from
Spaulding & Slye indicate increases approaching 200%. These
increases are calculated from gross rents. Increases in net rents, a
better basis for derivation of value, are proportionately greater. The
standard suburban office that could be bought for $50 to $75 per foot
in 1993 cannot be touched for less than $200 per foot today.

Ten
years ago, this writer advised that the then-current office market
decline represented a historic opportunity for wealth formation. (When
they are right about something, writers are allowed to toot their own
horn.) Other observers at the time cautioned that the price peak of the
late 1980s had been a "blip" or "hiccup." In retrospect, it seems that
the hiccup was not the peak but the trough that followed. The natural
state of the Boston real estate economy at times of strength in the
high tech sector is a scarcity of work space. Scarcity means price
increase. Unlike Dallas and Atlanta, we produce new space only slowly,
and scarcity can work for an extended period to bump up price.

The
change in the office market has been fueled in large part by the
dot.com economy. Through mid-2000, investors seemed willing to give the
new economy their faith. But beyond a certain level of price, investors
appear skeptical. The decline of the dot.coms in 2000 was accompanied
by a sharp decline in the volume of sales (but not price) in the urban
luxury housing market. The volume of sales for office buildings
similarly has fallen away. The volume drop can be explained in part by
skepticism. It can also be explained by our collective memory of the
trough from which we only so recently emerged.

Eric T. Reenstierna, MAI

The Reenstierna Associates Report is published as
a service to the clients of Eric Reenstierna Associates and other real
estate professionals. The views expressed are those of the articles'
authors and do not necessarily reflect those of other members of the
organization. Copyright 2001. All rights reserved.